Ohio: Lawmakers address tax and infrastructure issues

Senate Bill 208 repairs accidental tax on most small businesses for tax year 2015

Ohio Senator Bill Beagle has sponsored Senate Bill 208, which corrects an aberration in Ohio’s budget that unintentionally created a tax increase for small business owners. The main feature of SB 208 is that for tax year 2015, the only year that the aberration would have existed, any taxable business income under $125,000 for married taxpayers filing separately, or under $250,000 for other taxpayers, is subject to the graduated tax rates applicable to nonbusiness income. Business income in excess of those amounts remains subject to the existing 3 percent flat tax.

As we discussed in July, Governor Kasich wanted to eliminate all the income tax on pass-through business entities with gross receipts under $2 million. However, the final budget only enacted a 75 percent exemption for tax year 2015, while the 100 percent exemption is scheduled to kick in next year. For taxable income beyond the threshold amounts, business owners will pay a flat tax of 3 percent.

According to The Plain Dealer, the corrections contained in SB 208 lead to a reduction of about $337 for a self-employed person making $60,000 a year. A businessperson would have paid $113 in state income taxes this past April, but absent the correction, the taxpayer will pay approximately $450 in the current year. This aberration resulted from the fact that the flat 3 percent rate is higher than the current rate. SB 208 corrects this problem by imposing tax at the old rate.

Post-secondary school textbooks and capital improvements

House Bill 308 proposes amending the Ohio Revised Code to exempt college and vocational school textbooks from sales and use taxes. Its sponsors introduced it on August 31, 2015, so there is not yet any analysis or fiscal notes.

Senate Joint Resolution 3, also introduced on the last day of August, attempts to fund sewer and water capital improvements by way of the issuance of general obligation bonds. This requires a constitutional amendment, so SJR 3 proposes that a special election be held on March 15, 2016, to authorize the bond issue.

The language specifies that the sewer and water capital improvements are needed to:

Preserve and expand public capital infrastructure

Ensure public health, safety and welfare

Create and preserve jobs

Improve the economic welfare of Ohio’s citizens

The bond issue is limited to $1 billion of tax exempt bonds with a maturity date of 20 years.

Illinois: Chicago postpones the effective date of a tax ruling

The Chicago Department of Finance (CDOF) recently announced that it is postponing the effective date of Tax Ruling #12, pertaining to the Personal Property Lease Transaction Tax, from September 1, 2015, to January 1, 2016.

As we explained in July, the CDOF issued two rulings that taxed both ends of a consumer’s use of technology. Tax Ruling #12 imposes a 9 percent tax on the use of hardware and software. The other, Tax Ruling #5, relating to the city’s Amusement Tax, subjects users to a 9 percent tax when they use their electronic devices to listen to music and watch movies, television shows, and videos.

With respect to Tax Ruling #12, the CDOF’s announcement acknowledged the ruling caused providers and customers enough confusion to warrant a four-month extension, which would “allow businesses additional time to have questions answered and to make any necessary changes to their billing systems or other procedures.” During this time, the CDOF will consider possible ordinance changes in an effort to address such concerns. Any changes would require the City Council’s approval.

In addition, the announcement left open the possibility that the CDOF would issue further guidance on specific questions, though it has not done so yet.

Rulings leave Chicago open to litigation

A mid-August National Law Reviewarticle criticized the inconsistent sister rulings as the result of extending old taxes to new services, which creates opportunities for taxpayers to challenge both. Further, the article cited the disparate rulings as an example of a general lack of will to keep up with technology, which could be accomplished by amending tax laws to address novel industries and technologies.

Using the following example, the article illustrated the overlap between the use of computers and software for entertainment purposes, leading to uncertainty about which 9 percent tax applies:

[T]wo searchable video streaming services could be powered by identical hardware and software, but one provides educational and training videos, whereas the other is pure entertainment. The educational video service may have lease transaction tax exposure, whereas the technically identical entertainment video service would have no lease transaction tax exposure under Ruling #12 and would instead face the amusement tax. Indeed, if a work had dual use, access to the identical file could be "information" or not depending on the nature of the hosting website and the purposes of the site users.

The National Law Review argues that these inconsistencies create “serious uniformity problems” that taxpayers facing lease transaction tax assessments can use to launch state constitutional challenges to the City's position.” Under Article IX, titled “Revenue,” Section 2 requires that tax classifications "shall be reasonable and the subjects and objects within each class shall be taxed uniformly."

Ultimately, the CDOF’s “inconsistent characterization of similar transactions is the type of arbitrary discrimination the uniformity clause is intended to forestall.“

Washington, D.C. identifies 39 jurisdictions as tax havens

This was necessary because the tax haven law provided criteria to define tax havens, but did not specifically identify jurisdictions by name.

These tax haven jurisdictions are the following:

Andorra

Anguilla

Antigua and Barbuda

Aruba

Bahamas

Bahrain

Barbados

Belize

Bermuda

British Virgin Islands

Cayman Islands

Cook Islands

Cyprus

Dominica

Gibraltar

Gernada

Guernsey-Sark-Alderney

Isle of Man

Jersey

Liberia

Liechtenstein

Luxembourg

Malta

Marshall Islands

Mauritius

Monaco

Montserrat

Nauru

the islands formerly constituting the Netherlands Antilles

Niue

St. Kitts and Nevis

St. Lucia

St. Vincent and the Grenadines

Samoa

San Marino

Seychelles

Turks and Caicos Islands

U.S. Virgin Islands

Vanuatu

According to thefiscal impact statement for the Fiscal Year 2016 Budget Support Act of 2015, “linking a specific set of jurisdictions to the definition [of] tax havens in the District’s Official Code” enables the Office of Tax and Revenue to enforce reporting requirements more effectively. The Act is expected to increase business income tax revenues by $3.7 million in fiscal year 2017 and $10.6 million in the fiscal years 2016 through 2019.

The U.S. Public Interest Research Group (USPIRG) takes a strong position against corporate tax loopholes, asserting that offshore tax havens cost taxpayers up to $150 billion in tax revenue annually. The group laments the fact that with “at least 83 of the nation's top 100 publicly traded companies establishing shell companies in offshore havens to avoid taxes, this is becoming more the rule than the exception.”

Further, the USPIRG contends that companies that do utilize off shore tax havens enjoy an unfair advantage relative to those that do not. As a result, lawmakers are forced to compensate by enacting deep cuts to essential public services, like education, healthcare, and clean air and water.

Last year, USPIRGnoted that only Montana and Oregon maintained a statutory list of tax haven jurisdictions. Montana’s tax haven list is almost the same as Washington, D.C., though Montana includes Panama as a tax haven.

In 2015, Oregon updated its list, which is also largely the same as Washington, D.C.’s, with a few exceptions. The District of Columbia includes Monaco and the islands formerly constituting the Netherlands Antilles as tax havens while Oregon does not. Oregon includes Bonaire, Curacao, Guatemala, Sint Eustatius, Sint Maarten, and Trinidad and Tobago as tax havens, whereas the District of Columbia does not.

For additional information regarding these subjects, or any other multistate tax issues, please contact one of the attorneys listed below.